Is Wal-Mart Still a Blue Chip?

NEW YORK (TheStreet) -- All great companies are something like pigs. They grow and grow until their very size makes adaptation impossible.Wal-Mart (WMT) is now finding that out the hard way. So far this year, the stock has gained 9.4%. Sounds good, until you realize the S&P 500 index is up 18.7%. The smaller PriceSmart (PSMT) is up 23.9%. You can add Wal-Mart's dividend in there to get a total return of roughly 12%, but that's still not great.

There are three ways to make life better for shareholders -- raise sales growth, raise earnings or give more of earnings back to shareholders.

The top-line problem may be intractable. As numbers get bigger, they get harder to move. In its last fiscal year, Wal-Mart had $469 billion in sales. So far in its current fiscal year, it's had $231 billion. It should beat last year's figure with a good Christmas, but just barely.

Wal-Mart has also tapped out its original rural and exurban niche. Our Laurie Kulikowski writes the company is planning to open 210 new "neighborhood market" stores in the next 18 months, one-sixth the size of its regular places, and try an even-smaller concept called Wal-Mart Express, half-again as small.

But with about 4,000 of its regular-sized stores in the U.S., and another 600 large Sam's Club warehouses, it's hard to see how much of a sales lift will come from 210 smaller markets. And costs are higher in those urban locations Wal-Mart is targeting -- that has to hurt the bottom line.

Retail stocks are measured based on a percentage of sales to equity. Wal-Mart's figure is 52%. That's almost the same as that of Costco ( COST), and twice as high as Kroger ( KR). For a conventional retailer, it's about as high as it gets.

What about Amazon.com ( AMZN), which sells at more than two times its sales?

Amazon's figure is out of line because it is measured against other technology companies, but Wal-Mart is working hard to increase its online business, now about $10 billion/year, with grocery delivery and its Vudu video site leading the way.

Still, even if Wal-Mart outsold Amazon.Com online -- which isn't going to happen -- that would still represent just 25% of its total business.

The third way forward is to move from growth to yield. Wal-Mart's current dividend yield of 2.51% is held up by its quarterly dividend of 47 cents a share. Wal-Mart's clearing that easily -- the dividend costs $1.5 billion and net income last quarter was $4 billion.

Earnings per share can also be manufactured by buying back stock. That reduces the float and spreads earnings across fewer shares. In June, Wal-Mart authorized $15 billion in stock buybacks. The company has increased its borrowing to make that happen.

Apple ( AAPL) actually made money on its stock buyback, as the interest it paid on bonds was much less than the equity gains from the buyback. But with interest rates up generally, such deals look less attractive. If Wal-Mart can make the entire buyback in this fiscal year, the company's shares outstanding could fall to just over 3 billion.

Which brings up a problem I pointed to in July , that the family-owned Walton Enterprises LLC will own more than half the shares when the latest buyback is complete.

In practical terms, Wal-Mart is already "controlled" by its founding family, although it insists it won't act that way and will continue to have outside directors.

The bigger problem is that financial engineering may be taking management's eyes off what matters. Wal-Mart is cutting back on orders right before Christmas, Kulikowski writes, just a few months after media reports indicated the shelves were bare. Is it losing its vaunted logistical edge?

Wal-Mart is running at the ragged edge of what it can do. Growth prospects are limited, further growth could come at the expense of profits, and financial engineering threatens to take the company private, while logistical risks rise along with the top line.

So, is Wal-Mart still a blue chip?

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Dana Blankenhorn has been a business journalist since 1978, and a tech reporter since 1982. His specialty has been getting to the future ahead of the crowd, then leaving before success arrived. That meant covering the Internet in 1985, e-commerce in 1994, the Internet of Things in 2005, open source in 2005 and, since 2010, renewable energy. He has written for every medium from newspapers and magazines to Web sites, from books to blogs. He still seeks tomorrow from his Craftsman home in Atlanta.